Review No. 17: It's time to do something radical

“Who would buy a franchise?” It was a bold question but one Labor senator Deborah O’Neill felt compelled to ask after hearing a litany of shocking and emotionally charged testimony at a parliamentary inquiry into the scandal-ridden franchise sector.

The third round of the franchising inquiry heard from a cross-section of franchisees, including Caltex, Foodco (Muffin Break and Jamaica Blue), Retail Food Group (Donut King and Michel’s Patisserie) and Australia Post.

Photographs show the new Labor candidate for the seat of Robertson... Deborah O Neill ...taken at Bensville on the Central Coast Ben Rushton/bgr smh.news.robertson SPECIAL 0000Credit:Ben Rushton BGR

Bullying, intimidation, a power imbalance, churning of franchisees for profit, blatantly lying to sell a store and flogging business models that are built on wage fraud and franchisee was some of the evidence heard.

In the case of Caltex and Foodco, a series of franchisees outlined cases of price-gouging on the supply chain where the amount they are forced to pay for products such as Coke, milk and coffee beans is far greater than supermarkets charge.

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In February, Caltex dealt a blow to its franchisees when it announced it was getting out of franchising and planned to convert all of its franchised service stations to company-operated stores.

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Caltex said it had developed a "compelling and fair" offer to all franchisees. But many franchisees are up in arms, saying it is anything but fair.

Caltex franchisee Bruce Hollett said the valuations were grossly undervalued. He also said Caltex hasn’t played fair as a franchisor. For instance, the prices set by Caltex are significantly higher than if the stock was purchased by franchisees from suppliers directly.

In the case of soft drinks, Hollett said the wholesale cost of a 24 pack of 600ml cans of Coca-Cola is $22.26, yet Caltex charges its franchisees $49.31 a pack.

At Foodco, franchisees said two-litre bottles of milk costs $2 at the local supermarket yet Foodco requires its franchisees buy it from head office for $2.40. The franchisees said Coles charges $20 for a pack of Coke and Pepsi yet franchisees have to buy it from Foodco for $37.

When this sort of skimming is applied across many products, it adds up to significant profits for the franchisor and a burden on franchisees. Indeed, one of the benefits of being in a franchise network is to get economies of scale in negotiating pricing. If these benefits aren’t passed on it raises questions whether that’s fair and in the spirit of the Franchising Code.

Australia has more franchisees per head of population than anywhere else in the world and over the past few decades it has become a big contributor to the economy, generating an estimated $170 billion a year in revenue.

Yet it is becoming blatantly obvious that the Franchising Code of Conduct is no longer fit for purpose. According to Professor Jenny Buchan from the University of NSW, this inquiry is the 17th parliamentary review into franchising since 1976. If the committee doesn’t want another review, it will need to do something radical.

The inquiry heard less than 1 per cent of complaints received by the Australian Competition and Consumer Commission (ACCC) come from franchisees.

But some of the testimony was emotionally charged as franchisees were asked to explain the financial and personal damage of becoming a franchisee.

Devi Trimuryani bought into a Retail Food Group franchise, Michel’s Patisserie, in Charlestown, Newcastle in 2012 for $150,000. She is starring down the barrel of bankruptcy. “I wish I walked away a long time ago,” an emotionally distressed Trimuryani told a panel of politicians.

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In August, her lease is up and she will have to walk away with debts of more than $100,000.

She works more than 60 hours a week but has been struggling for more than three years when RFG decided to roll out a new model, known as the frozen model, where cakes and biscuits were delivered frozen instead of fresh daily. "I am working 24/7 for the company and I have no wages in my pocket," she said.

In other testimony, Faheem Mirza said he bought a new Muffin Break store in Sydney’s inner west suburb of Burwood and after 12 months he had to walk away. “I have lost everything I came to Australia with,” he said.

He said Foodco lied to him and said it had conducted a marketing study that indicated a Muffin Break store would do well. After he signed the franchise agreement he was told it can’t work without free labour and underpayment of wages.

Maggie Xu told the parliamentary inquiry she paid $300,000 for a Foodco Jamaica Blue franchise in the Burwood shopping centre in 2014. She said it was a six year franchise agreement and the lease was three years.

A couple of years after signing the agreement, Foodco opened a Muffin Break store close by, which cost her 40 per cent of her sales.

She said when the lease was up for renewal, Foodco refused to renew, refused any new buyers for the store and forced her to vacate the site for no compensation then billed her $43,000 to de-fit the shop. In her submission she said there was no compensation for the fact that the franchise agreement still had more than three years left.

She said after three years of working long hours for no money, she lost her entire savings and is in debt. “New legislation needs to come in to prevent others experiencing what I have experienced,” she said.

It prompted Senator John Williams to say: “We are hearing too many sad stories”.

He asked, what is the solution?

Senator John Williams.Credit:Alex Ellinghausen

It is a complex question that needs to be considered carefully given the size and the number of people and businesses involved.

One thing is for sure FRANdata Australia’s Darryn McAuliffe’s testimony that he doesn’t believe there is an endemic problem, that the statistical level of disputes in Australian franchising remains quite low, at around 2 per cent, that mediation is a highly effective dispute resolution mechanism and that minimal changes are required, sounds more like where the sector should be than where it is.